Minnesota estate tax cuts not enough to slow Sun Belt migration, wealthy say

The “death tax” may not be the main factor driving the wealthy out of Minnesota, however.

When Gov. Mark Dayton signed a $508 million tax-cut bill last month, it wasn’t only the middle class and businesses that got a break from the $1.2 billion budget surplus — Minnesota millionaires also received the largesse.

These taxpayers, collectively, saved $43 million from the repeal of the state’s gift tax and an estate tax reconfiguring. The gift tax died after just one year; millionaires can exclude twice as much of their estate (to $2 million, a jump from $1 million, phased in over five years).

But millionaires and their financial advisors want more, saying if they don’t get it, the “death tax” is more fuel for the move to low-tax states such as Florida, especially in the wake of rising income tax rates. The exodus of the wealthy and their much-sought charitable giving, they claim, continues, with negative consequences  for Minnesota’s fabric of life.

State Revenue Department officials scoff, noting that seven of 10 estates that now pay the tax won’t in 2019. They argue “tax mobility” isn’t statistically significant, reducing state estate tax collections by a mere $13 million to $30 million annually — at most a couple-tenths of one percent of state revenues. It’s a small price to pay to retain what they call the “state’s most progressive tax.”

The price of non-conformity

This year, a Minnesota Senate bid to bump up the state’s exemption to match the federal level of $5.3 million failed. A $2 million exclusion, advisors contend, is simply too small to affect Sun Belt flight that accelerated when the state imposed a new a top individual income tax rate of 9.85 percent for married couples earning $250,000 or more and $150,000 for single filers in 2013.

“It’s really a battle over what ‘middle class’ is, and the state of Minnesota isn’t going along with Congress’ definition,” said Robert Abdo, an estate planning attorney and vice president of Lommen Abdo law firm.

“By not matching the federal estate tax, it just continues the conversation that Minnesota is going to find ways to keep raising revenues from the same core group of people,” added Ross Levin, president of Accredited Investors Inc.

In 2012, 2,043 estates filed Minnesota estate tax returns and 1,232 actually owed money, according the state revenue department. “The problem is the message that it sends,” Levin says.

Revenue Commissioner Myron Frans, however, questions whether such “tax migration” of the wealthy is anything approaching an epidemic. Frans notes that the vast majority will see significant tax savings by the time the changes are fully phased in by 2019 — no mean accomplishment for a state long characterized as unfriendly to the rich.

“Seventy percent of the estates that owed under the prior law will not owe under the new law,” Frans said, adding that it’s the first change to the provision in a decade.

A taxation dinosaur

Still, Minnesota is one of only 15 states that even has estate taxes on the books. Overall, it accounts for just 0.9 percent of the state’s total tax revenues; before the exemption was bumped up last month, the estate tax was forecast to raise $173.4 million in fiscal year 2014.

A $10M estate’s taxable portion (dark bar)

Source: “Minnesota Estate Tax Study,” Minnesota Department of Revenue, March 5, 2014
In this chart, the dark bar shows the portion of a hypothetical $10M estate subject to the 2014 estate tax among the 15 U.S. states that retain the tax. The lighter bars represent the exclusion levels. By 2019, Minnesota’s exclusion will be $2 million.

The estate tax is highly concentrated among a few Minnesotans. About half of the revenues have come from estates valued at $5 million or more, according to a March study from Frans’ department.

Raising the exemption to $2 million dings state coffers an estimated $63 million in FY 2015, $91 million in 2016 and $97 million in 2017. 

Dayton framed the estate tax changes as a blow for simplifying how it has been imposed, which was indeed confusing and complicated. Because of a “rate bubble” left from an old federal law, a 41-percent tax was levied on approximately the first $100,000 of an estate above the exemption amount, with 9-16 percent levied on the remainder. Filers needed to calculate two tentative amounts, then pay the lesser the lesser of two. 

This year’s changes wiped out the rate bubble  — a move praised by nearly everyone. But because the exemption was raised to “just” $2 million, the benefits for the wealthiest Minnesotans will be negligible, and thus their incentives to leave have not been lessened, said Terry Slye, estate planning section chair of the Briggs and Morgan law firm.

“The way the rates and brackets work is if you’re in the $1 million-to-$2-million frame, you’ll get a fair amount of tax savings five years from now, but estates above that really won’t see any significant savings,” he said.

“My own experience is that if people are moving out of state more often that not, it’s the income tax, not the estate tax that maybe really is the driving force,” he added. “It depends person-by-person. But we certainly have seen in the last year or two a number of long-standing Minnesota clients who have either moved to Florida or announced plans to move to Florida and are in the process of doing that. It’s a concern.”

Frans, however, points to studies showing such “tax-induced mobility” has little significant effect on state revenues, estimating that such behavior has reduced estate tax collections between $13 million and $30 million per year.

“What we’ve done with doubling the estate tax exemption is really an important step for us as a state,” he said. “It’s a matter of simplicity and fairness. There’s this concern about how consistent we are with other states. There are only two states with estate taxes that match the federal exemption level (Delaware and Hawaii).”

Adds Frans, “The fact that people are complaining about what we didn’t do — as opposed to what we did do —is their prerogative, but we are actually quite proud of the significant reform we’ve accomplished this last year.”

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Comments (39)

  1. Submitted by Greg Kapphahn on 04/18/2014 - 09:28 am.

    I’ve Often Heard it Said That Minnesota Winters

    Help keep the “riff-raff” out,…

    but I can’t help but think Minnesota’s estate tax may ALSO help keep an entirely different class of “riff-raff” out,…

    namely those “I-me-mine” types who, after extracting as much wealth from the pockets of their fellow citizens as they could manage,…

    think they “created” all that wealth, themselves, and thus shouldn’t have to share a penny of it it with their fellow citizens, whose hard work and creativity were where that wealth actually came from,…

    AND the types who fail to realize that the quickest and easiest way to curse your children is to raise them rich with the idea that, when mom and dad pass on, they’re going to get even richer.

    The smartest wealthy people I know are the ones who’ve made it clear to their children that they’re not leaving them a penny.

    So, all you, “I-me-mine” types who will leave the state because of Minnesota’s estate tax,…

    don’t let the door bruise your backsides on the way out.

    Besides, you’ll be wanting to move back in about twenty years when the effects of global climate change make the sunbelt paradises you’re moving to into desertified wastelands which are VERY expensive to live in.

  2. Submitted by Jeff Klein on 04/18/2014 - 09:36 am.

    Good riddance

    Yeah, we don’t need anyone here who has benefited so much from our state’s infrastructure and well-educated population but who is willing to relocate to avoid a small nick in the sum they pass on to their kids. And we don’t need their stupid bluffs either. If they want to live in the utopia that is Floria, nobody’s stopping them.

  3. Submitted by Paul Brandon on 04/18/2014 - 09:53 am.

    The only actual numbers cited (by Frans)

    seem to show that Minnesota does NOT have any significant net population loss due to taxes (we see the same argument from businesses). One can always cite anecdotes, but that doesn’t prove anything. It’s the same argument as the ones about losing business due to high taxes; no there there.

    What is happening is predictable:
    The rich are complaining about the taxes; lobbying to get them reduced. At the same time they are enjoying the benefits of the services provided by these taxes; police and fire protection; road maintenance, etc.
    It’s the universal desire to get something for nothing.

  4. Submitted by Ray Schoch on 04/18/2014 - 10:04 am.

    There’s nothing admirable

    …about allowing the growth of an aristocracy in Minnesota based on inherited wealth, nor is there anything especially mean-spirited about requiring the wealthy to pay a tax, upon their death, to make some small progress toward avoiding that kind of aristocracy.

    To those leaving in order to avoid paying an estate tax, my response is: “Don’t let the door hit you on the way out, folks.”

  5. Submitted by Gerald Abrahamson on 04/18/2014 - 10:59 am.

    Make it simple and easy to understand.

    “You can’t take it with you” needs to be the motto.

    So, a $500k exemption (indexed to inflation) and then 100% tax rate on ALL estates. This is a completely *conservative* concept, not liberal in any way.

    Conservatives believe you gotta “EARN” what you get. Therefore, by definition, there can be no SUBSTANTIVE inheritance by anyone if we are to follow that concept–because a person can not ‘earn’ an inheritance. The resources to create that wealth were taken from the economy, so those resources need to go back into the economy to be re-used. Hence, a 100% estate tax on everyone (after the exemption). Next we will hear conservatives screaming about “IT’S MINE and I can do with it as I wish !!”. Uh, you’re DEAD. You are doing one thing–rotting in the ground (or in an urn). Deal with it. You are NOT making any decisions. Somebody else made that choice for you. You move on–so does your wealth.

  6. Submitted by David Markle on 04/18/2014 - 11:27 am.

    Asking for the impossible

    Do you suppose the climate might be a small factor, especially considering the last winter?

    • Submitted by Todd Hintz on 04/23/2014 - 12:15 pm.

      Climate

      That was my primary thought when I first read the article. I know some of the folks who are affected by the estate taxes and to a person they all have second places in warmer climates that they can go to in the winter. Not a one of them has a second home in northern Ontario because, gosh darn it, it’s just too hot in Minnesota when that northwest wind blows.

      I’m far from wealthy, but even I plan to move to someplace warmer once I retire. The last thing I want to deal with is slippery sidewalks and a broken hip when I’m 75 years old.

  7. Submitted by Paul Udstrand on 04/18/2014 - 11:27 am.

    Nice Gerald

    “Conservatives believe you gotta “EARN” what you get. Therefore, by definition, there can be no SUBSTANTIVE inheritance by anyone if we are to follow that concept–because a person can not ‘earn’ an inheritance. ”

    Well stated. Economic mobility in the US has stagnated in the last several decades and the ability to hoard wealth is part of that problem. These people have already seen a 400% increase in their income at the expense of the other 90% of the population. Single mothers on food stamps are supposed to pull themselves up the bootstraps and make their way without “handouts”, why should a family member get a million dollar leg up just because they were born?

    I’ll tell ya what need, we need a capital flight tax. If you change your residency after earning more than $300k a year in this state you have to leave 20% of the last five years income behind when you leave.

  8. Submitted by Bill Coleman on 04/18/2014 - 11:29 am.

    Snow in April

    I wonder if snow and cold from November 1 till April 18 have anything to do with people moving south?

    If the state had the same tax rates as Florida, these financial advisors might say the same thing – lower tax rates is not enough to stop migration of some people to the south.

    It would be interesting to see the data about retirees moving south – how does this trend by income and wealth? There a lot of Minnesotans living is small manufactured villages in the south. How does the migration of senior citizens in North Dakota compare to Minnesota?

    Anyone have any data to these questions? It might be more informative than the bash the rich guys responses listed here. After all, you have no idea what these people are doing with their tax savings. And we have no idea what the political leanings of these folks are either!

  9. Submitted by Ray Schoch on 04/18/2014 - 12:51 pm.

    Nicely done

    …Mr. Abrahamson.

  10. Submitted by John Appelen on 04/18/2014 - 12:54 pm.

    Interesting…

    Since I come from a family who has worked hard to build the family estate generation after generation, I do find these comments amusing. From my great grand parents who settled a piece of ground in the 1800’s to myself who has been conditioned to work hard, learn, invest, give to charity and live conservatively.

    4+ generations of hard working Minnesotans that made good decisions, helped build the State and paid a huge amount of taxes while doing it. And for seem reason many of the commenters think that the wealth accumulated during these decades belongs to the “public”…

    I guess if you want to encourage wasteful spending and dissuade people from investing in the State, you may be on to something. I would prefer to encourage people to invest “their” wealth within the State of MN…

    • Submitted by Greg Kapphahn on 04/18/2014 - 04:24 pm.

      Take It to the Wilderness

      I’d suggest that a fourth-plus generational member of a family which as done well finds it nearly impossible to imagine what it would be like to be a first-generation member of that family.

      But for a helpful perspective, imagine taking your family’s enterprises to the middle of nowhere, with no township, county, state or nation around you, nor any roads nor any connections to the outside world and see how things go.

      All those things that don’t exist in that imaginary middle of nowhere world would have to be built by YOU. In the past such things were built by friends and neighbors joining together into governments of various kinds. Today they must be maintained by those same types of entities.

      We ALL share a responsibility to keep up that shared infrastructure, and, if we want our society to survive, to make sure that we, through our government (the only entity large enough) take care of those growing up in less fortunate circumstances than ourselves.

      And, perhaps some of us need to bear in mind that, given other circumstances of origin, or living in other places only a few miles away, all that hard work which now provides us with such excellent rewards wouldn’t even keep food on our tables or a roof over our heads.

      • Submitted by Michael Hess on 04/18/2014 - 05:42 pm.

        Missing the Point

        No one that I have read is suggesting the companies or individuals are trying to stop paying tax on their income that funds these services. But why should a family enterprise be sacrificed to the government when the originator dies?

        Of course they will continue to pay taxes to support the ongoing government services they need. Their employees and owners will pay tax on their income from the enterprise.

        This bizarre attitude that when someone dies they should give back their gains as they “owe” it to the society that let them succeed seems to ignore that they paid taxes all the time they were earning and working which supported the government services for them and the less fortunate.

        Given how lopsided the tax rates are even a few high income, wealthy departures will deprive the state of a lot of tax that it uses to provide those services the rest of the population deserves. “Good Riddance” may give the sour grapes crowd a feeling of satisfaction but it’s ultimately going to cost them more.

        • Submitted by Greg Kapphahn on 04/19/2014 - 08:57 am.

          Even After the Recent Tax Increases

          Minnesotans of lower and middle incomes pay a higher percentage of their total incomes in taxes than to our state’s wealthiest citizens.

          • Submitted by John Appelen on 04/19/2014 - 09:53 am.

            Your source

            I am not disagreeing with you, but please provide your source.

            I am interested in the details. Do they account for the social cash benefits that are paid to the lower and middle income citizens? (ie net expense) Almost all of these are phased out as income increases. (EITC, Food Stamps, Heating Assistance, Housing Assistance, Medicaid, etc) I am thinking of the programs where the gov’t actually transfer Public money into a Private citizen.

            I have no problem taxing the “rich” to pay for MN’s costs… I mean they are the ones with the money to pay the bills… I do get frustrated though at the contempt with which they are treated.

            If the lower income folks pay 10% of their income to the government and get back 20% in cash benefits… By my simple math they are paying -10%, while still using our roads, firemen, police, libraries, etc.
            http://www.revenue.state.mn.us/research_stats/research_reports/2013/2013_tax_incidence_study_links.pdf

      • Submitted by John Appelen on 04/18/2014 - 08:34 pm.

        Appreciation

        Who do you think paid for and pays for those critical roads and that shared infrastructure?

        The folks who pay almost nothing in taxes after benefits are paid, or those who pay 10, 20 or $30,000 or more in State and Local taxes each year?

        Now those who are better off are already paying the majority of the State’s bills, yet it never seems to be enough. It is odd that the first generation folk aren’t more appreciative of the Minnesota that the fourth generation bought and paid for through decades and decades of hard work and taxes…

  11. Submitted by Ron Morris on 04/18/2014 - 01:28 pm.

    Small business

    As a small business owner, I’m appalled when I read our tax officials say that there are not concerned about a ‘few’ wealthy leaving the state. The ‘wealthy’ are the ones who spend money to support local businesses, chase them away and there is no one left to churn the economy. Not to say the support for non-profits and charitable organizations that would never survive without the support of those ‘evil’ rich people.

    • Submitted by John Appelen on 04/18/2014 - 03:33 pm.

      You Know the Old Saying

      A poor person doesn’t hire anyone…

      • Submitted by Frank Phelan on 04/18/2014 - 05:07 pm.

        Actually

        A lot of business do very well financially be preying on the poor. Want to bet which ZIP codes contain the most check cashing outfits? Do you think there was a lot of equity-stripping of home owners in Wayzata?

    • Submitted by Greg Kapphahn on 04/18/2014 - 04:15 pm.

      If Your “Small Business” is a Boutique or Car Dealership

      With high-priced items, which caters only to wealthy clients, you may be right,…

      but the vast majority of the money spent in most businesses in Minnesota comes from regular folks just buying the necessities of everyday life.

      Perhaps we need ANOTHER old saying,…

      “When the rich have and hoard all the money, all the businesses which used to sell to everyone who’s NOT rich (including those owned by those rich people), go OUT of business.”

    • Submitted by Frank Phelan on 04/18/2014 - 05:03 pm.

      Prophetic

      This statement will be true once the middle class is extinct. So, about ten years from now.

  12. Submitted by Terence Fruth on 04/18/2014 - 01:39 pm.

    Minnesota Tax Migration

    Having practiced law in Mn for many years, I believe that tax migration has caused significant tax loss. There are three taxable events that cause the major loss to the state and the big one is the sale of a business. A resident who is selling a business or selling stock options has a significant taxable event, that by itself, justifies a move to Florida before the tax has been incurred. Sometimes the tax includes significant ordinary income which results in a tax drag over over 50% on that income if the person is a Minnesota resident. Once the move to Florida occurs it cannot be undone for a long time. The continuing exposure to a much higher tax drag on Minnesota residents keeps that person in Florida.
    I have discussed this with legislators and they know what is happening, but do not want to deal with reform as they will be accused, as the comments suggest above, of favoring the rich. Tax y reform goes undone because people do not have, or do not want to get, the information. It is available. This reform can be accomplished and add revenue to the state. Some courage is required.

  13. Submitted by Connie Sullivan on 04/18/2014 - 03:10 pm.

    The wealthy who are complaining about the estate tax, which they would prefer very much not to pay at all (or have their heirs pay), are probably the same ones who try to fenagle the number of days they spend in Minnesota and what ties they have to our state, to avoid paying our income taxes, too.

    The motivation is not to get away from snow and ice and cold. The motivation is to avoid paying for the local and state services and infrastructure they have long benefited from. During their lives, and then for their heirs.

    Minnesota is already moving to tighten up the rules on residency for tax purposes, and it’s about time. Since one of the proposed new rules is “Where does your attorney, and your accountant, live and work–Minnesota, or XX?” the people making a lot of this new noisy complaining are the attorneys and accountants and stockbrokers, who will be losing their Wealth Management fees if these folks “move” to a sunnier clime where they owe no taxes.

    I’m finding it really hard to be sympathetic to the problems alleged here. Really hard.

    • Submitted by John Appelen on 04/19/2014 - 12:23 am.

      No Sympathy Required

      People with money usually are smart and know how to work, save and invest.

      If MN wants to keep people like this in the state, MN needs to be competitive with other states.

      And if MN charges more, these citizens need to see a higher value in living here than else where.

      I know it is hard for some readers here to understand, the wealth of these citizens is their Personal Property. Not the State’s property. That is unless you want the State to be able to seize the money from your checkbook.

      • Submitted by Greg Kapphahn on 04/19/2014 - 08:45 am.

        The State ALREADY Has the Power to Sieze Money

        It’s called taxes.

        The only question is how much and who pays.

  14. Submitted by John Appelen on 04/19/2014 - 08:46 am.

    A Different Perspective

    Many here seem to believe that people are doing something wrong when they take actions to reduce the amount of taxes they have to pay.

    With this computer capable crowd, that left me wondering how many of you shop online in part to avoid paying the MN sales tax?

    Or worse yet, how many of you go to a Best Buy store to touch and check out the merchandise, and then go online to save money? Thereby not helping to pay for the store, it’s employees or the taxes…

    Thoughts?

  15. Submitted by Dale Kurschner on 04/20/2014 - 06:52 pm.

    Wealth is indeed leaving Minnesota — by the billions

    Good story across the board. It touches on only one aspect of the bigger issue, which is indeed driving billions of dollars in tax revenues out of Minnesota: http://tcbmag.com/Opinion/Columns/Editors-Note/Warning-Minnesota-Is-Losing-Its-Wealth.

  16. Submitted by Robert Gauthier on 04/21/2014 - 09:10 am.

    Always amazing ….

    To see the “logic” applied in these arguments. Mr. Kappahn, do you really believe these business owners “made” all their money themselves? What about roads, schools, tax breaks, legislation to preserve business advantage (farm breaks and grants, sales restrictions in auto and liquor industries, etc). This is an example of what will make this country and state poor, self determination of value and lack of insight. Minnesota was made wealthy by the Minnesota Miracle, before we were a middling to poor state, much of it like NW Minnesota, poor and isolated. The advent of education, roads, infrastructure and leadership made this state the prosperous island it is- go live in rural ND or SD and see what rural poverty is like.
    Finally, let em leave, they always come back for healthcare when they are sick, Florida doctors ain’t so great when they are sick- another commons advantage of state education- good care.

    • Submitted by John Appelen on 04/21/2014 - 11:16 am.

      Who Paid

      “roads, schools, tax breaks, legislation to preserve business advantage ”

      I’ll ask again… Who do you think paid for all these items? The people and businesses with high incomes and huge tax bills, or the people with low incomes and almost no tax bills?

      10% on $10,000 = $1,000/yr
      10% on $100,000 = $10,000/yr
      10% on $1,000,000= $100,000/yr

      Are you really sure you want them to leave?

      • Submitted by Joel Fischer on 04/22/2014 - 10:02 am.

        Is Income Tax the only source of revenue for the State?

        It’s not really that hard to understand that EVERYONE plays a part in paying for the things that we all require.

        • Submitted by John Appelen on 04/22/2014 - 11:23 am.

          No it is not

          However, well to do people often have bigger homes and nicer cars. Therefore they pay larger taxes in these areas also.

          My point is that someone paying a higher percentage of a very low income isn’t paying for many roads. And if you give them free health insurance, heating assistance, housing, food, etc, they are paying for no roads and actually costing the state money. (ie negative tax rate)

          I am just trying to make a very pragmatic point… The middle and upper income households pay the state’s bills. We really don’t want any of them to leave.

  17. Submitted by Tom Anderson on 04/22/2014 - 06:53 pm.

    We tell the rich to get out

    And we’re begging the folks that want marijuana to stay. One group will end up costing the state money in lost tax revenue and the other.. Oops, the other group costs the state money with extreme medical bills that drive up healthcare costs.

    • Submitted by Jonathan Ecklund on 04/23/2014 - 01:00 pm.

      Huh?

      “the other group costs the state money with extreme medical bills that drive up healthcare costs.”

      Please explain how allowing doctors to prescribe cannabis will alter the cost-curve of medical expenses?

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